America’s richest family, the Waltons, worth more than $100 billion, has exploited a variety of legal loopholes to avoid the estate tax, according to court records and Internal Revenue Service filings obtained through public records requests. The Waltons’ example highlights how billionaires deftly bypass a tax intended to make sure that the nation’s wealthiest contribute their share to government. Alice Walton’s mother and brother have poured more than $9 billion into trusts since 2003. Her former sister-in-law, Audrey Walton, pioneered a tax-avoidance maneuver now widely used by U.S. billionaires.
Estate and gift taxes raised about $14 billion last year. That’s about 1 percent of the $1.2 trillion passed down in America each year, mostly by the very rich, former Treasury Secretary Lawrence Summers estimated.
“I hate to say it, but the very rich pay very little in gift and estate tax,” said Jerome Hesch, a lawyer at Berger Singerman in Miami who reviewed some of the Walton family’s trust filings for Bloomberg News. “At the Waltons’ numbers, the savings are unbelievable.”
Wal-Mart heiress Alice Walton founded the Crystal Bridges Museum of American Art in Bentonville, Arkansas, in 2011 next to her childhood home, supplying dozens of paintings from her personal collection. It is bankrolled by more than $1 billion in donations from her family. It’s a monument to their skill at preserving that fortune across generations. Most of the money for Walton’s museum — more than $1 billion, including endowments — came from the Walton Family Foundation, the family’s main charitable arm. The foundation, in turn, is funded mostly by a series of 21 trusts. Sam Walton’s widow, Helen, set up four of the trusts in 2003. Her estate established 12 more after her death in 2007. Her son John, who died in an ultra-light plane crash in 2005, provided for five more in his estate.
The money put into these trusts is ostensibly for charity. If the assets appreciate substantially over the years, though, the trusts can pass money tax-free to heirs. A donor locks up assets in these trusts, formally known as charitable lead annuity trusts, for a period of time, say 20 or 30 years. An amount set by the donor is given away each year to charity. Whatever is left at the end goes to a beneficiary without any tax bill. the IRS assesses how much gift or estate tax is due, based on how much of the trust’s assets will end up benefiting charity and how much will go to heirs. Most donors structure the trusts so that the heirs’ estimated leftover is zero or close to it.
The IRS makes its estimate using a complicated formula tied to the level of U.S. Treasury bond yields during the time when the trust is set up. If the trust’s investments outperform that benchmark rate, the extra earnings pass to the designated heirs free of estate tax. The rate has been hovering near all-time lows since 2009. For trusts set up this month, it’s 1.4 percent.
With a big enough spread between the actual performance and the IRS rate, a trust can save so much tax that it leaves a family richer than if it hadn’t given a dime to charity. In January 2003, the IRS rate of 3.6 percent was the lowest since 1970. Those trusts can save taxes only if they beat that 3.6 percent rate. From 2007 to 2011 — the years for which the IRS provided public copies of the trusts’ tax returns — they did so handily. The trusts returned about 14 percent a year before taxes during that period, according to a Bloomberg analysis of IRS filings. That growth means the four Helen Walton trusts have been accumulating assets faster than they give them away. As of 2011, they held a combined $2 billion, up from $1.4 billion in 2007. Barring a stark reversal of fortune, at least that much money will probably pass to Helen Walton’s heirs. Jay Friedman, an accountant at Perelson Weiner LLP in New York, examined data compiled by Bloomberg estimated that single trust would last 39 years and would leave $2.2 billion for Helen Walton’s heirs.
Helen Walton funded her trusts not with Wal-Mart stock but with a stake in Walton Enterprises LLC. That may have allowed her to exploit another loophole in the tax code — one that lets the wealthy discount the value of their fortunes by 30 percent or more. Walton Enterprises is essentially a vehicle for holding the family’s Wal-Mart stock. Individuals can claim that the value of a stake in such holding companies is far less than that of the underlying shares — even if the family can liquidate the stock whenever it wants. The IRS lost a series of Tax Court cases in the 1990s to taxpayers who contended that holding assets through such companies diminished their value. One clue in the IRS filings from the 2003 trusts suggests that Helen Walton claimed such a discount, according to Hesch, the Miami lawyer. The trusts own stakes in Walton Enterprises that generated dividend yields of about 7 percent a year, more than three times what Wal-Mart stock paid out during the same period. Such high-dividend yields signal that the family may be valuing the Walton Enterprises stake at far less than the value of the underlying stock, Hesch said. The technique can be used to “super-charge” the tax savings from a charitable trust, he said.
“It’s beyond belief,” said Wendy Gerzog, a professor at the University of Baltimore who has written extensively about the discounts. The practice creates “a world of unreality.”
Spurred by low interest rates that magnify the tax savings, the richest Americans have amassed at least $20 billion in trusts such as those used by the Waltons. They include Elaine Marshall, the Koch Industries Inc. director, and Fidelity mutual funds’ Johnson family.
Sam Walton started arranging his affairs to avoid a potential estate tax bill in 1953. That year, he gave a 20 percent stake in the family business to each of his children, keeping 20 percent for himself and his wife. “The best way to reduce paying estate taxes is to give your assets away before they appreciate,” he wrote.
Estate and gift taxes raised about $14 billion last year. That’s about 1 percent of the $1.2 trillion passed down in America each year, mostly by the very rich, former Treasury Secretary Lawrence Summers estimated.
“I hate to say it, but the very rich pay very little in gift and estate tax,” said Jerome Hesch, a lawyer at Berger Singerman in Miami who reviewed some of the Walton family’s trust filings for Bloomberg News. “At the Waltons’ numbers, the savings are unbelievable.”
Wal-Mart heiress Alice Walton founded the Crystal Bridges Museum of American Art in Bentonville, Arkansas, in 2011 next to her childhood home, supplying dozens of paintings from her personal collection. It is bankrolled by more than $1 billion in donations from her family. It’s a monument to their skill at preserving that fortune across generations. Most of the money for Walton’s museum — more than $1 billion, including endowments — came from the Walton Family Foundation, the family’s main charitable arm. The foundation, in turn, is funded mostly by a series of 21 trusts. Sam Walton’s widow, Helen, set up four of the trusts in 2003. Her estate established 12 more after her death in 2007. Her son John, who died in an ultra-light plane crash in 2005, provided for five more in his estate.
The money put into these trusts is ostensibly for charity. If the assets appreciate substantially over the years, though, the trusts can pass money tax-free to heirs. A donor locks up assets in these trusts, formally known as charitable lead annuity trusts, for a period of time, say 20 or 30 years. An amount set by the donor is given away each year to charity. Whatever is left at the end goes to a beneficiary without any tax bill. the IRS assesses how much gift or estate tax is due, based on how much of the trust’s assets will end up benefiting charity and how much will go to heirs. Most donors structure the trusts so that the heirs’ estimated leftover is zero or close to it.
The IRS makes its estimate using a complicated formula tied to the level of U.S. Treasury bond yields during the time when the trust is set up. If the trust’s investments outperform that benchmark rate, the extra earnings pass to the designated heirs free of estate tax. The rate has been hovering near all-time lows since 2009. For trusts set up this month, it’s 1.4 percent.
With a big enough spread between the actual performance and the IRS rate, a trust can save so much tax that it leaves a family richer than if it hadn’t given a dime to charity. In January 2003, the IRS rate of 3.6 percent was the lowest since 1970. Those trusts can save taxes only if they beat that 3.6 percent rate. From 2007 to 2011 — the years for which the IRS provided public copies of the trusts’ tax returns — they did so handily. The trusts returned about 14 percent a year before taxes during that period, according to a Bloomberg analysis of IRS filings. That growth means the four Helen Walton trusts have been accumulating assets faster than they give them away. As of 2011, they held a combined $2 billion, up from $1.4 billion in 2007. Barring a stark reversal of fortune, at least that much money will probably pass to Helen Walton’s heirs. Jay Friedman, an accountant at Perelson Weiner LLP in New York, examined data compiled by Bloomberg estimated that single trust would last 39 years and would leave $2.2 billion for Helen Walton’s heirs.
Helen Walton funded her trusts not with Wal-Mart stock but with a stake in Walton Enterprises LLC. That may have allowed her to exploit another loophole in the tax code — one that lets the wealthy discount the value of their fortunes by 30 percent or more. Walton Enterprises is essentially a vehicle for holding the family’s Wal-Mart stock. Individuals can claim that the value of a stake in such holding companies is far less than that of the underlying shares — even if the family can liquidate the stock whenever it wants. The IRS lost a series of Tax Court cases in the 1990s to taxpayers who contended that holding assets through such companies diminished their value. One clue in the IRS filings from the 2003 trusts suggests that Helen Walton claimed such a discount, according to Hesch, the Miami lawyer. The trusts own stakes in Walton Enterprises that generated dividend yields of about 7 percent a year, more than three times what Wal-Mart stock paid out during the same period. Such high-dividend yields signal that the family may be valuing the Walton Enterprises stake at far less than the value of the underlying stock, Hesch said. The technique can be used to “super-charge” the tax savings from a charitable trust, he said.
“It’s beyond belief,” said Wendy Gerzog, a professor at the University of Baltimore who has written extensively about the discounts. The practice creates “a world of unreality.”
Spurred by low interest rates that magnify the tax savings, the richest Americans have amassed at least $20 billion in trusts such as those used by the Waltons. They include Elaine Marshall, the Koch Industries Inc. director, and Fidelity mutual funds’ Johnson family.
Sam Walton started arranging his affairs to avoid a potential estate tax bill in 1953. That year, he gave a 20 percent stake in the family business to each of his children, keeping 20 percent for himself and his wife. “The best way to reduce paying estate taxes is to give your assets away before they appreciate,” he wrote.
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